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Are ICOs a Scam?

Can They Provide a Different Approach to Venture Capital Funding?

With recent news concerning fraudulent projects like Confido, where $375,000 were stolen from investors, many people believe Initial Coin Offerings (ICOs) are synonymous to scams: funding that does not lead to a concrete project and has no clear regulation. However, in comparison to the classical venture model, ICOs provide the world with a more democratized funding model.

But what’s the biggest problem with venture capital; why do we need a change? One reason is the sheer amount of funding that takes place behind social proof: it essentially mimics a fraternity. A negative consequence of this is that there’s a strong gender bias in venture funding, with some groups of people earning more for no fundamental reason. For instance, in this articleby Fortune, men were dealt with fewer deals but had more funding in each of those rounds; the inverse stands true for female founders: “In 2016, women got just 2.19% of venture capital funding.” There’s two paths from today; either the unlikely scenario that venture capital firms radically change their behavior pertaining to funding early-stage companies or a path chosen historically, founders simply bypass these middlemen entirely.

As the internet removed the oligarchy of publishers and newspapers on information, ICOs seek to do the same thing with funding companies, specifically in the blockchain sector. Within the equity route, founders might sacrifice large swaths of their companies for funding, possibly losing control of their path in the future as venture capitalists seek to maximize their returns. In hindsight, they regret giving up their company; if one can imagine the blood, sweat, and tears that were placed in their organization, selling seems like a less than ideal choice. However, partaking in an ICO is not selling one’s soul to the devil.

Blockchain companies don’t have to give up equity to fund their projects, they can issue token sales in which investors purchase a certain allocation of tokens. The incentive is that investors want the network to succeed, which would increase the price of the respective tokens. But ICOs could still be scam-like: where does the regulation come in?

There are indeed parallels between this and the Dot-Com Bubble: unabashed fundraising coupled with little due diligence. Yet, the Dot-Com burst removed the fragile and birthed the beginnings of the technology companies we know today, from Paypal to Amazon. We still use the internet today even after the majority view dismissed it as a technology that would never shock the world; this is the path blockchain technology will take. Similarly, there are some ICOs that should make any investor run away as rapidly as possible, but this does not take away from the notion that they can be an excellent funding model for a variety of businesses.

What we should expect in the future is increasing regulation from bodies like the Securities and Exchange Commission (SEC) on what ICOs can and cannot do. As a result, the ICO process will become vastly streamlined and mentally digestible for the average person. Over time, this will become a more culturally acceptable method of funding. Because of technological fear and ignorance, individuals herd together and dismiss capabilities that are out today, assured that they will never happen. However, time clarifies: joint-stock companies, electricity, and the internal combustion engine — leading to the automobile — are all examples of technology surpassing even our wildest imaginations.

Therefore, ICOs as a funding model aren’t scams and they’re not going away. The outdated venture model of centralized funding is going to change drastically as we know it: either the industry keeps up or they lose their leverage. Any technology that brings about this level of worship — as we saw with the internet — deserves a second-look and eventually ICOs will become a standard model of funding for many soon-to-be billion-dollar businesses.